Student debt has a chilling effect on employees' retirement planning

New research from MissionSquare Research Institute offers a fresh look at the significant impact of student loan debt on employees’ financial planning, investment decisions, and retirement savings.

The findings suggest that debt-saddled workers tend to focus on near-term financial needs, limiting their ability to build long-term wealth.

Drawing from a survey of more than 2,000 public- and private-sector employees, the report found many with student debt are either not investing at all or opting for short-term, lower-risk investments that tend to produce lower long-run returns.

In the public sector, 34 percent of employees with student debt reported that they are not investing, compared to 26 percent in the private sector. Among those who do invest, 29 percent of public sector employees and 36 percent of private sector employees prioritize short-term investments.

“The need for liquidity could drive this investment behavior,” the research states, noting that borrowers often prioritize debt repayment over long-term investment opportunities.

Sacrificing tomorrow to survive today

The report found that student loan borrowers tend to put off crucial financial goals as they focus on shorter planning horizons. Employees with student debt are more likely to focus on immediate financial needs rather than long-term goals such as retirement. The data suggest that these employees are less likely to plan for five to ten years into the future and more likely to focus on the next few months or a single year.

Retirement savings adequacy was another key concern. The study found that employees with student debt are significantly more likely to feel they are not saving enough for retirement. Public sector employees with student debt were 14 percent more likely, and private sector employees 9 percent more likely, to strongly agree that they should be saving more. The most common barriers cited were affordability – reported by 73 percent of public sector workers and 70 percent of private sector employees – and excessive debt.

Among public sector employees with student debt, 54 percent cited too much debt as a primary barrier to their retirement savings efforts, compared to 47 percent of private sector employees. Other barriers hindering workers nest egg-building included competing saving priorities and uncertainty about how to start saving. Only 6 percent of public sector workers and 7 percent of private sector workers with student debt reported that they were unsure how to save for retirement.

Student debt: the bigger picture

Before leaving the White House, former president Joe Biden claimed student loan relief initiatives under his administration provided more than $180 billion in debt cancellation to more than 5 million borrowers.

As it stands, total student loan debt in the US exceeds $1.7 trillion, with roughly 43 million borrowers carrying student debt. Throughout 2024, Biden’s policies focused on expanding loan forgiveness through adjustments to income-driven repayment plans, public service loan forgiveness, and targeted debt cancellation for long-term borrowers and those misled by for-profit colleges.

The Saving on a Valuable Education (SAVE) plan, fully implemented in July 2024, reduced payments for millions of borrowers, capping payments at 5 percent of discretionary income for some, with balances forgiven after 10 to 25 years. By early 2025, 4.5 million borrowers were enrolled in SAVE. Other efforts, such as the Fresh Start Initiative, helped 7.5 million borrowers in default regain good standing.

The White House under Donald Trump has not made any statements on how it intends to tackle the student debt crisis, but policy experts have said the student loan relief agenda would be at risk under his watch.

On the presidential campaign trail in June last year, he apparently slammed his predecessor's initiatives to forgive student loan debt as "vile", though he did extend some valuable lifelines to borrowers during his first administration, notably the extension of a freeze on student loan repayments and interest during the early months of the Covid pandemic.